Question

3. According to their comparative advantage, Alphaland specializes in axes and Betaville specializes in batons. Alphaland will trade axes for batons if: (A) The price of batons is higher than Alphaland's cost to produce axes. (B) The price of batons is lower than Betaland's cost to produce axes. (C) The price of batons is lower than Alphaland's cost to produce batons. (D) The price of batons is higher than Betaland's cost to produce axes.

Answer 1

Answer: Option (C) is correct.

Explanation:

A country has a comparative advantage in producing a commodity if the opportunity cost of producing that good is lesser in that country as compared to the other country.

From the information given in the question, it is clear that Alphaland has a comparative advantage in axes and Betaville has a comparative advantage in batons.

Hence, Alphaland will trade axes for batons only if the price of batons is lower than the cost of producing it in Alphaland. So that there is a possibility mutually beneficial trade.